Accounting Information Systems

SUGGESTED ANSWERS TO THE CASES

8.1 1. How does Miller fit the profile of the average fraud perpetrator?

 Like many fraud perpetrators, David Miller was not much different than the
general public in terms of education, values, religion, marriage, and psychological
makeup.
 Like Miller, many white-collar criminals are regarded as ideal employees until
they are caught. Like him, they are dedicated and work long hours.
 He was well respected, occupied a position of trust, and was viewed as an honest,
upstanding citizen.
 Most fraud perpetrators spend all that they steal. Few invest it. Miller was no
exception.

How does he differ?

 Miller was not disgruntled and unhappy, nor was he seeking to get even with his
employer.
 Though David Miller was never convicted of fraud, he was involved in a number
of schemes. In contrast, most fraud perpetrators are first time offenders.

How did these characteristics make him difficult to detect?

It is often difficult to detect fraud perpetrators because they possess few

characteristics that distinguish them from the public. Most white-collar criminals are
talented, intelligent, and well educated. Many are regarded as the ideal employee that
occupies a position of trust, is dedicated, and works hard for the company. They are
otherwise honest, upstanding citizens that have usually never committed any other
criminal offense.

2. Explain the three elements of the opportunity triangle (commit, conceal, convert)
and discuss how Miller accomplished each when embezzling funds from
Associated Communications. What specific concealment techniques did Miller
use?

There are three elements to the opportunity triangle:

1. The perpetrator must commit the fraud by stealing something of value, such as
cash, or by intentionally reporting misleading financial information.

Miller was able to steal cash by undermining the internal controls that required
two signatures on checks. He asked company officials to sign checks before they
went on vacation "just in case" the company needed to disburse funds while they
were gone.
2. To avoid detection, the perpetrator must conceal the crime. Perpetrators must
keep the accounting equation in balance by inflating other assets or decreasing
liabilities or equity. Concealment often takes more effort and time and leaves
 behind more evidence than the theft or misrepresentation. Taking cash requires
only a few seconds; altering records to hide the theft is more challenging and
time-consuming.

To conceal the theft, Miller retrieved the canceled check from the bank
reconciliation and destroyed it. The amount stolen was then charged to an expense
account of one of the units to balance the company's books. Miller was able to
work himself into a position of trust and influence. Because he occupied this
position his actions were not questioned and he was able to subvert some of the
internal controls intended to prevent the type of actions he was able to take.

3. The perpetrator must convert the stolen asset into some form usable by the
perpetrator if the theft is of an asset other than cash. For example, stolen inventory
and equipment must be sold or otherwise converted into cash. In financial
statement fraud, the conversion is more indirect, such as in undeserved pay raises,
promotions, more stock options, etc.

Miller was able to convert the check to cash by writing himself checks and
depositing them in his personal account.

3. What pressures motivated Miller to embezzle? How did Miller rationalize his
actions?

Motivation. After David Miller had undergone therapy, he believed his problem with
compulsive embezzlement was an illness, just like alcoholism or compulsive
gambling. He stated that the illness was driven by a subconscious need to be admired
and liked by others. He thought that by spending all of that money others would like
him. Ironically, he was universally well liked and admired at each job and it had
nothing to do with money. In fact, one associate at Associated was so surprised at the
news of the thefts that he said that it was like finding out that your brother was an ax
murderer. Miller also claimed that he is not a bad person, that he never intended to
hurt anyone, but once he got started he just could not stop.

Rationalization. The case does not specify what Miller's rationalizations were. He
may, in fact, have had a number of different rationalizations. The case suggests that
he "needed it" to pay back the money he stole from previous employers. He was
always "just borrowing" the money and intended to pay it back. Miller may have also
been convinced that he would never be prosecuted for his crimes. Many of the
rationalizations listed in the text are also possibilities.

4. Miller had a framed T-shirt in his office that said, “He who dies with the most
toys wins.” What does this tell you about Miller? What lifestyle red flags could
have tipped off the company to the possibility of fraud?

Miller's life seemed to be centered on financial gain and the accumulation of material
goods or, as the quote says, "toys." Such gain, he felt, would lead to prestige and
recognition among his friends in the business community.
 Accounting Information Systems

The wealth and extravagant spending in relation to Miller's salary was the primary red
flag that most companies never questioned. Consider that on his $130,000 a year
salary he was able to afford two Mercedes-Benz sedans; a lavish suburban house; a
condominium at Myrtle beach; expensive suits; tailored and monogrammed shirts;
diamond, sapphire, ruby, and emerald rings for his wife; and a new car for his father-
in-law.

5. Why do companies hesitate to prosecute white-collar criminals?

 Negative publicity. Companies are reluctant to prosecute fraud because of the

financial damage that could result from negative publicity. A highly visible fraud
is a public relations disaster. The company could lose a lot of business due to the
adverse publicity.

 Exposes system weaknesses. Reporting and prosecuting fraud may reveal

vulnerabilities in a company's system. This could attract even more acts of fraud.

 Concern for the perpetrator's family. If an employee is willing to make

retribution, companies may not press charges to protect the employee’s family
and reputation.

 Society is more concerned with "real" crime. Political considerations motivate

enforcement officials to focus their resources on more violent and visible crimes
such as rape, murder, and robbery. Some people see fraud as an internal problem
and not as a serious crime that demands prosecution.

 Unclear definition of computer fraud. One reason computer fraud is not

prosecuted more is that the definition of computer fraud is so vague. As a result,
no one really knows how much it really costs and there isn't as much motivation
to go after computer fraud cases.

 Prosecution difficulties. It is difficult, costly, and time consuming to investigate

fraud. It is even harder to prove. As a result, it can be hard to prosecute fraud
cases successfully and get convictions.

 Lack of expertise. Many law enforcement officers, lawyers, and judges lack the
skills necessary to investigate, prosecute and evaluate fraud, especially computer
fraud.

 Light sentences. When fraud cases are prosecuted and a conviction is obtained,
the sentences received are sometimes very light. This discourages prosecution.
 What are the consequences of not prosecuting?

When fraud is not prosecuted, it sends a message to employees and to the public that
enforcing laws is not important to the company. A reputation for being "soft" on
fraud may result in the companies becoming increasingly vulnerable to additional
fraud.

Failure to report and prosecute a fraud also means that the perpetrator goes free and
can repeat his or her actions at another company, as David Miller did. If the
perpetrator does not have to pay the consequences of his actions, she is more likely to
repeat them because she "got away with it" and was not punished.

How could law enforcement officials encourage more prosecution?

To encourage more fraud prosecution, law enforcement officials must take actions to
solve each of the problems mentioned above. In addition, they must encourage more
effective reporting of such crimes. The public should be educated to recognize and
report fraud as a serious offense.

6. What could the victimized companies have done to prevent Miller’s

embezzlement?

Not much is said in the case about how Miller committed many of the frauds. In each
of the frauds, it is likely that the theft of cash could have been prevented by tighter
controls over access to cash and blank checks and to the means of writing and signing
checks. Some could have been prevented or at least detected by better control over
monthly bank statements and their reconciliation.

In retrospect, Miller was given too much trust and authority and that led to a
breakdown of internal controls. However, companies have to trust their top level
employees, such as the CFO. Even though this trust is necessary, a greater separation
of duties and more supervision of Miller's work would have made it more difficult for
him to perpetrate the frauds.

In all but the first fraud, a more thorough background check of Miller may have
revealed his past fraudulent activities and the company could have avoided the
problems that arose after he was hired.